With 2020 hindsight and the best rear view mirror clarity (j/k), Q3 appears to be THE deflection point in where the economy began to impact the enterprise software vendors. A flurry of continued lowered guidance on earnings by vendors reflects the general nervousness sweeping customers and prospects as we head into the most important quarter…Q4.

Major trends in Q3 include:

Overall new license revenues down for most on-premise vendors except IFS, Intuit, JDA, and SAP, who have managed to buck the trend. Continued drop in this leading indicator for long term growth is a troubling sign.

Vendors continue to focus on cranking up maintenance and service revenues, though most vendors have put off any maintenance price increases.

Exceptions to the trend in on-premise apps license revenue decline include purpose built solutions or vendors with deep verticalization strategies. For example, IFS’ is gaining traction with its focus on micro verticals and project based businesses. Retail’s re-emergent focus on reinvesting in operations is bolstering JDA’s business.

Subscription revenue vendors (i.e. SaaS vendors and vendors with SaaS/OnDemand offerings) continue to grow at breakneck paces with Ariba (73%), Concur(72%), CA (55%), and Taleo (49.4%), leading the charge in year over year quarterly revenue growth.

Here’s the break down of year over year quarterly new license sales numbers/recurring revenues:

Enterprise Software Vendors with Perpetual License Revenues (YoY)*

CDC Software – License down 16% to $12.8M / Maintenance up 12% to $24M / Services down 15% to $21.1M

Deltek – License down 13% to $18.5M / Maintenance up 12% to $29.3M / Services up 1% to $23.1M

The bottom line – the price wars in Q4 are real but the best deals may come in Q1.

Initial results show that SaaS vendors appear to be the main beneficiaries with customers seeking shorter term contracts (i.e. moving away from one year agreements back to the month to month model). Try before you buy is definitely picking up. However, early Q4 indicators from conversations with sales professionals and prospects indicate that Q4 discounting for on-premise software remains fierce and as competitive with SaaS pricing. Prospects and existing customers should take advantage of Q4 price wars but be cognizant that deals in Q1 2009 may be even better because most vendors will have exhausted their Q1 pipelines!

Your turn.

What’s the best deal you are getting? Feel free to post your comments here or send me an email at rwang0@gmail.com .

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Great post- I always like it when facts support what I beleive… Re Alexander’s point: the on premise vendors still have money, huge install base and a well crafted money making machine that SaaS vendors can only dream of.
I think they all realize a change is needed but building a SaaS play in an on premise culture is hard and I am not even talking about developers but rather on sales people that are used to making 3% commission on a 20M deal. Try to replace this with the “drop-drop-drop” of SaaS revenue…

Great analysis. However, I can’t imagine the on-premise vendors not responding to the SaaS guys in adjacent markets. Do you think the SaaS vendors will over take on-premise during this next recession? Will I be able to get a better deal on SaaS or on-premise? I’ll tweet you later.

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Meet R "Ray" Wang

R “Ray” Wang is the Principal Analyst, Founder, and Chairman of Constellation Research, Inc. He’s a best selling author of “Disrupting Digital Business” published by Harvard Business Review Press. His popular business strategy and technology blog “A Software Insider’s Point of View” has a viewership in the 10′s of millions of page views a year. Ray’s blog provides insight into how disruptive technologies and new business models impact the enterprise.